Marine Products (MPX)

07 Jun 2016 23:17
Tags mpx stock_review_2016

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Back in my younger days, every free chance we got we would travel to Maine to enjoy some vacation time on Big Sebago Lake. Back then we cruised the lake on a 19 foot Chaparral Bow Rider filling up our time with water-skiing, tubing, or just relaxing on the boat and taking a slow cruise. There were quite a few boats on the lake back then but Chaparral was the outright favorite for boaters.

That was 20+ years ago and I no longer have a boat nor do I travel enough to the lake I enjoyed for oh so many summers. But to my surprise I have discovered that Chaparral boats are still being manufactured today and remain the top seller. Even more surprising I discovered the manufacturer of Chaparral is a publicly traded company under the name Marine Products Corporation (MPX) and (this is the best part) on its way to becoming a dividend growth company.

MPX manufactures fiberglass boats under the product names of Chaparral and Robalo with a total of 50 different products. While Chaparral has long been known for power boats, the Robalo brand was acquired shortly after the company was spun-off in 2001 and provided instant access to the recreational salt water fishing market.

In regards to competition, MPX’s largest competitors are Bayliner, Cobalt, Regal and Sea Ray but the powerboat market is extremely crowded with many other smaller companies with traditional names like Chris-Craft, Four Winns, and Starcraft. Competition is not any lighter in the fishing boat market and MPX needs a consistent new product roll-out in both markets to remain current and competitive.

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As a dividend grower MPX has been paying a dividend since 2001 but drastically cut it in 2009 and suspended dividends in 2010 and 2011. Since 2009 the dividend has grown from $0.01/share to $0.24/share with a recent 50% increase. In addition to the generous dividend growth, MPX has issued a special dividend every year since 2012. If you had the courage to endure the 2009-2011 dividend cut, you would have been well compensated for lost dividends via the special dividends.

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Like any investment we shall perform the due diligence of analyzing MPXs annual financial statements to understand if the dividend is on solid ground and opportunities for dividend growth.

Note: The following financial analysis is based on MPX’s 2015 annual report.

Liquidity

2015 2014 2013
Current Ratio 3.79 3.31 3
Quick Ratio 1.21 .77 .87
Days to Collect Receivables 2.12 4.99 4.35
Days to Sell Inventory 73.9 76.7 76.7
Liquid Current Assets $17M $10M $13M
Long Term Debt $0 $0 $0

The current and quick ratios indicate a strong level of liquidity and when you combine it with no long term debt this company is well positioned to access cash for emergencies or to capitalize on opportunities.

The days to sell inventory seems high but considering they operate in a seasonal consumer discretionary market it is not out of line.

Profitability

2015 2014 2013
Revenue Growth Rate 55.55% 12.5% 14.2%
Operating Expense Ratio 11% 12% 12%
Net Income as a % of Sales 7% 5% 5%
Return on Assets 13% 9% 8%
Cash Used for Investing $3M $4M 1M
Free Cash Flow $6M $1M $4
Dividend $8M $6M $6M

MPX has been improving in many areas year over year. Operating expenses are decreasing, revenue is growing and they are getting better returns out of their investment into capital expenditures as shown by the growing Return on Assets.

Credit Risk

2015 2014 2013
Debt Ratio 0.18 0.19 .20
Interest Rate Coverage Ratio - - -

MPX has no long term debt so there is no interest rate coverage ratio. The debt ratio which is amazingly low gets better year over year, another indicator expenses are shrinking and margins are growing.

Future Growth

2015 2014 2013
Capex to Depreciation Ratio 4 .57 .71
R&D Investment $663K $743K $1.1M
Acquisitions $0 $0 $0
Share Buyback $16M $22M $15M

As stated earlier, MPX operates in a pretty crowded market so they need a continuous year after year launch of new or upgraded products. MPX is not making extreme investments, management knows their business and markets extremely well and strategically invest the right amount of money into capital equipment and R&D. For example, last year MPX rolled out the all new Robalo 160. The Robalo 160 a smaller boat that is reaching a new market thanks to its low cost for boating beginners.

In regards to acquisitions I am not surprised that no money has been has been spent. The boating market is fairly crowded and acquiring another boating product would cannibalize existing sales. While management continually states they are open to acquisitions, I believe that sentiment is limited to acquiring new manufacturing or material technologies to improve existing product lines.

Shareholder Value

2015 2014 2013
P/E Ratio 16 36 48
Book Value per Share $2.39 $2.2 $2.15
Dividend Yield 3.3% 1.9% 1.49%

MPX’s share price has not grown with its revenue growth, improving book value, or reduced operating expenses. I understand share prices were overinflated during 2013 & 2014 based on the high PE but when it dropped to a PE of 16 in 2015 you have to wonder if the market is late to catch up.

Conclusion

MPX has conservative financials and is very liquid but its future is extremely dependent on how strong the economy is. The existing dividend is well covered and still has room to grow with a low dividend payout ratio of 54%.

Investing in MPX is not for those with a weak stomach. You have to be prepared for significant price volatility based on:

  1. When the economy tanks so does MPX revenue.
  2. MPX is a small cap stock with a market cap of just $315M
  3. MPX is thinly traded, average daily volume currently sits at 11,644

Because there will be significant price volatility I would initiate a small position at $8/share or lower.

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